Wednesday, March 29, 2017

Hey Ivanka, The Problem with Paid Parental Leave

By Xiong Yue

A Chinese fable called "Three in the Morning and Four in the Evening" relates this story: An old man in ancient China wanted to reduce his pet monkeys' food as he can't afford the previous amount any longer. He first told them that he would reduce the monkey's ration to three acorns in the morning and four acorns in the evening. Thereupon, his monkeys protested angrily. Then the old man said, "How about four in the morning and three in the evening?" Knowing that he would get four acorns the next morning, the monkey became ecstatic.

We may laugh at the monkey in this story, but when actress Anne Hathaway gave a speech at the United Nations this month arguing for paid parental leave for all parents — both mothers and fathers — she is no wiser than the monkey.

In a capitalist economy, the labor market, as well as other sectors of the market, is made possible by the entrepreneurs who attempt to make profits. After an entrepreneur conceives a profit opportunity in his mind, he starts to organize the production according to his plan. Entrepreneurs pay for the factors of production in advance to get the finished goods and services in return. He or she must also be able to deliver these goods or services at a price lower than what customers are willing to pay. Otherwise, the business will fail.

In other words, since the entrepreneur wants to make sure that the sale price of outputs exceeds the cost of inputs, he or she "will attempt to employ a factor at the price that will be at least less than its discounted marginal value product," as Murray Rothbard writes in Man, Economy, and State.

Like the prices of other factors of production, the upper limit of the rent of labor — what we usually call wages — follows the same rule. Entrepreneurs would hire an employee only if doing so brings a larger return. Meanwhile, the lower limit of wages is determined by the bids of competing entrepreneurs.

Supporters of paid parental leave, such as Anne Hathaway, fail to understand that a so-called paid parental leave would not be a gift to the worker. When entrepreneurs consider whether they should hire a worker, they consider how much they would pay for this worker in total, not just the nominal wage.

In weighing the pros and cons of the hiring of workers the employer does not ask himself what the worker gets as take-home wages. The only relevant question for him is: What is the total price I have to expend for securing the services of this worker? In speaking of the determination of wage rates catallactics always refers to the total price which the employer must spend for a definite quantity of work of a definite type, i.e., to gross wage rates. If laws or business customs force the employer to make other expenditures besides the wages he pays to the employee, the take-home wages are reduced accordingly. Such accessory expenditures do not affect the gross rate of wages. Their incidence falls entirely upon the wage-earner. Their total amount reduces the height of take-home wages, i.e., of net wage rates.